ustxtxb_obs_1992_06_05_50_00007-00000_000.pdf

managing Blue Cross-Blue Shield’s data processing division when Congress established Medicare and Medicaid and Blue Cross got the contract to administer hospital payments. Texas Blue Cross subcontracted the computer work to Perot and EDS although it was illegal for Blue Cross to give a subcontract to one of its own employees. Perot also used federal tax money to develop his data processing system. As the proliferation of computers reduced the potential market for reselling time on mainframe computers, Perot repositioned EDS to management of insurance data processing. EDS and its subsidiaries took in more than $37 million over five years from Medicare and Medicaid subcontracts in Texas, California, Pennsylvania, New York, Massachusetts, Iowa, Kansas, Indiana and Minnesota \(see “Welfare pays Perot’s dues” by Kaye Northcott, TO, 4/14/72, and “Congress Looks,” contractor in the nation. In 1968, when EDS went public, the company was reporting a gross profit of .42.3 percent, Perot was worth $300 million and Fortune magazine was listing him among the richest and fastest Texans. A series of glowing profiles in the national press followed. Perot Storms Wall Street In 1970, Perot swept into Wall Street as the self-appointed savior of the ailing securities industry. With the New York Stock Exchange’s blessings, Perot poured $70 million into sickly duPont Glore Forgan, a Wall Street brokerage house. After the takeover, Mason wrote, Perot and Morton Meyerson, his longtime business associate who Perot put in charge of the brokerage, stood out on Wall Street like missionaries. EDS executives were struck by the brokers’ sixhour workdays, cocktails at lunch and other signs of a relaxed work ethic. Perot, who enforced a strict dress code at EDS that included white shirts, was appalled when a key aide he sent to to straighten out a California brokerage wore a fashionable blue shirt for a meeting with Perot. Efforts to teach phone courtesy and good work habits, as well as pushing brokers to work nights and weekends, eventually led to a largescale defection of experienced brokers. Taking another page from his EDS manual, Perot hired ex-military officers as duPont trainees and required them to sign a contract obligating them to work off $25,000 in training costs. The securities market withered in the early 1970s. In 1973 Perot merged duPont and another ailing firm, Walston & Co., into the nation’s second-largest brokerage house, duPont Walston Inc., over the objections of the Walston family. Less than a year later, the giant firm went bankrupt. In a $90-million lawsuit, Winthrop J. Allegaert, the court-appointed trustee of the bankrupt firm, accused Perot of rigging the merger to get Walston to assume the liabilities while duPont would share in any profits. Mason wrote that Perot paid $6 million to settle the lawsuit and assured creditors of being repaid. The shareholders, including the Walstons, received nothing. Perot lost $60 million on his Wall Street venture. Congress Looks Congress’ first extended look at EDS came in 1971, when the Intergovernmental Relations Subcommittee of the House Committee on Government Operations was checking Social Security’s operation of the new Medicare and Medicaid systems. EDS did data processing for Texas Blue Cross under a no-bid contract. Perot also received more than $250,000 in federal money through Blue Cross to create the system for processing health-care claims. But when Social Security officials wanted to use it in other states to hold down the costs of health care assistance, Perot refused, claiming the system was his property. Perot also refused to open his books to government auditors, claiming his contract was with Blue Cross, not the government. Perot quit Blue Cross in December 1967 and signed a facilities management contract with Blue Cross in January 1968 as the insurance carrier was getting a new Medicare contract. Although the government required Medicare carriers to submit subcontractors for approval, the EDS subcontract got no such government review. The contract also lacked the standard clause giving federal auditors the right to inspect the records of a company with which it was contracting. And the contract was approved without competitive bidding, in apparent violation of government regulations. A Blue Cross official in February 1968 told government officials the EDS contract was exempt because more than half of the EDS work was for the non-government side of Blue Cross, but by the following June, Blue Cross admitted that Medicare already was a majority of EDS’ workload. When an HEW administrator balked at reimbursing EDS for expenses the agency considered exorbitant, he was told it was costing Texas Blue Cross $3.05 to process an insurance claim while the national average for comparable plans was $3.96. But government auditors were denied access to EDS’ books and a regional representative for the HEW’ s Bureau of Health Insurance testified that Blue Cross’ service was shoddy and it seemed to pay a “significantly higher proportion” of their cost for data processing than other carriers. Perot declined to testify before the subcommittee, but he agreed to meet with subcommittee members in private. “He maintained the position that he was doing the government a service and he was developing an efficient manner of health-care processing and that he was losing money on his government work and making money on his private sector work,” said former Rep. John Buchanan, who was then the ranking Republican on the subcommittee. “Finally [Perot] said, ‘OK I will open my books to demonstrate what I’m saying,’ but the books he opened were those of EDS F[ederal], a subsidiary he created for the government business, and those books were so concocted to show that EDSF was losing money on its government work, but those books also showed all sorts of ill-defined services rendered EDSF by the parent company, EDS, whose books he still declined to open.” Government auditors could not tell how much money the company was making out of government business, Buchanan said, but they found he was charging a higher price for government work than he charged for private work. “By their estimates he was grossly overcharging and was using a system that should have belonged to the people as his own, and he was using that as a basis to bill these services all across the United States, state by state, until he had the lion’s share of the business.” By the time he took his company public in the third year of his involvement in government health care programs, Buchanan estimated that he was making a 40-percent profit, due largely to Medicare and Medicaid work. When government auditors reviewed EDS books in California, they showed the company made a 20.1 percent after-tax profit, although the report pointed out that competitors were not able to do the work more cheaply, the Dallas Times Herald reported in 1977. When the subcommittee started its hearings in 1971, Buchanan said, “I started out predisposed as a Republican and somebody who believes in the free enterprise system to like Perot and to be an admirer of this guy who was on the cutting edge of computer technology and built this big company and made a lot of money…. The more I looked and heard, the more outraged I became, as a taxpayer and as a citizen, at a man enriching himself on the backs of the old folks and out of the pockets of the taxpayers and claiming to be a big hero in the process. “We can’t meet the needs of the old folks to this good day because it costs too doggone much, and I’m convinced that Ross Perot is one of the reasons, although he will claim the opposite…. We did not find any illegality,, but there is a distinction between illegality and wrongdoing, and I feel there was a great deal of wrongdoing,” Buchanan said. He’s Nationwide Congress took another look at Perot’s operation in 1975, when Social Security Commissioner James Cardwell was accused of favoritism toward Perot’s firm in a corporate battle over $9 million worth of Medicare data processing business of Iowa Blue Shield. The aggrieved competitor in this case was Optimum Systems Inc., owned by Clint Murchison, the oilman who was then owner of the Dallas Cowboys. Optimum’s director of corporate development charged that an after-the-fact change in the evaluation criteria put Perot’s firm ahead in the bidding process and overruled the recommendations of lower-level SSA officials \(See “Iowa Infighting: Perot v. Murchison” by Jackee Cox, From 1969 through 1974, EDS Federal had an estimated 90 percent of subcontracts for Medicare data processing. Perot’s control of the business was the subject of an investigation by the U.S. Department of Health, Education and Welfare in 1974, which expressed concern over the anti-competitive situation. The THE TEXAS OBSERVER 7 -kr